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Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany

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Author Info

  • Fuest, Clemens

    ()
    (ZEW Mannheim)

  • Peichl, Andreas

    ()
    (ZEW Mannheim)

  • Siegloch, Sebastian

    ()
    (IZA)

Abstract

Because of endogeneity problems very few studies have been able to identify the incidence of corporate taxes on wages. We circumvent these problems by using an 11-year panel of data on 11,441 German municipalities' tax rates, 8 percent of which change each year, linked to administrative matched employer-employee data. Consistent with our theoretical model, we find a negative effect of corporate taxation on wages: a 1 euro increase in tax liabilities yields a 77 cent decrease in the wage bill. The direct wage effect, arising in a collective bargaining context, dominates, while the conventional indirect wage effect through reduced investment is empirically small due to regional labor mobility. High and medium-skilled workers, who arguably extract higher rents in collective agreements, bear a larger share of the corporate tax burden.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7390.

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Length: 45 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7390

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Keywords: business tax; wage incidence; administrative data; local taxation;

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References

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  1. R. Alison Felix & James R. Hines, Jr., 2009. "Corporate Taxes and Union Wages in the United States," NBER Working Papers 15263, National Bureau of Economic Research, Inc.
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  8. R. Alison Felix, 2007. "Passing the burden: corporate tax incidence in open economies," Regional Research Working Paper RRWP 07-01, Federal Reserve Bank of Kansas City.
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  11. Sebastian Krautheim & Tim Schmidt-Eisenlohr, 2011. "Wages and International Tax Competition," Working Papers 1123, Oxford University Centre for Business Taxation.
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  13. Barth, Erling & Zweimuller, Josef, 1995. " Relative Wages under Decentralized and Corporatist Bargaining Systems," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(3), pages 369-84, September.
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  15. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
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Cited by:
  1. Asatryan, Zareh & Baskaran, Thushyanthan & Heinemann, Friedrich, 2014. "The effect of direct democracy on the level and structure of local taxes," ZEW Discussion Papers 14-003, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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